Small Cap Value Report (25 Nov 2014) - TPT, BAR, HVN, CAMB

Good morning! I'm writing this from the departure lounge at Gatwick, off for a 6-day trip to Las Vegas! So due to the time difference, reports for Wed-Fri this week (and possibly Mon next week) will be published in the evenings UK time, sorry about that.

Topps Tiles (LON:TPT)

Share price: 107p
No. shares: 193.6m
Market Cap: £207.2m

Results for the year ended 27 Sep 2014 have been published this morning. The company has been putting out positive trading statements for a while, so it's no surprise that the headline figures look good - in particular, I am very impressed with +8.1% LFL sales growth for the year, and an impressive gross margin of 60.9%.

If you add 8.1% to last year's sales of £177.8m, that comes out at £192.2m, which is only £3.0m short of reported sales of £195.2m, which implies that nearly all the growth in turnover is from existing stores, rather than new store openings.

I make that an additional £8.7m in gross profit from existing stores, plus about £1.2m additional gross profit from the 70 bps improvement in gross margin. I would have expected most of that to flow through to the bottom line. However, adjusted operating profit has only risen by £4.1m to £17.1m, which is less than I anticipated.

Adjusted EPS is only up 21.9% to 6.63p. So where has the operational gearing gone? These figures suggest to me that overheads must have gone up a lot too.

Looking at the P&L, I think I've found the reason why - the employee profit sharing line has gone up considerably, from £6.3m last year to £9.8m this year. That is laudable - I'm all for employees getting a meaningful profit share in the good years, but it blunts the investing case, because a big chunk of the operational gearing is given away to staff. Therefore shareholders need to take that into account, and weigh up the short term cost with the long term benefit of increased employee motivation, lower staff turnover, reduced training costs, etc.

The share price is 107p, so that gives a PER of 16.1, which looks a fairly punchy rating, especially when you factor in that the company has net debt of £30.5m, although personally I always offset freehold property against net debt, and in this case the company has £16.0m of freehold property.

Outlook - looks strong. The first 8 weeks of the new year is seeing a further increase in LFL sales, of 6.7%, which is impressive. Although it would be worth checking the phasing of the increased sales last year, to ensure that the company is not up against soft comparatives now, but stronger ones later in the current year.

My opinion - I like this business, and it has 30% market share, but the valuation looks up with events for the time being, in my view.

It's forecast to do 8.33p EPS this year, a PER of 12.8, which looks reasonable. I might revisit this one later this year, if it dips down to about 80-90p - that would be the sort of level where I would find it appealing as a buy.

Eclectic Bar (LON:BAR)

Share price: 150p (down 22% today)
No. shares: 12.9m
Market Cap: £19.4m

There's a profit warning today. The company traded in line in Q1 (Jul-Sep), but changed spending patterns & increased competition saw Oct below expectations.

The company says that H1 adjusted EBITDA is likely to be around £1.1m. Of course, EBITDA is meaningless, as bars have to constantly spend on capex.

I reviewed this company after its most recent results here on 30 Sep 2014, and formed a negative view, which has turned out to be correct. This is a good example of a Private Equity or Venture Capital backer cashing out by floating the company, and then the bad news comes out a few months later. They must have seen it coming, or why else sell out?!

It's nearly always a mistake to buy IPOs where the seller is PE or a VC. They usually leave behind a ravaged Balance Sheet with too much debt, and you can be certain they are selling for a reason - that the good times are coming to an end. Also the price will nearly always be too high.

My opinion - this company looks at best, marginal. I doubt it will ever have the capacity to pay any worthwhile dividends, hence the shares are probably not worth very much. Younger people spend a lot less in bars these days, as they pre-load at home, on much cheaper supermarket booze. So a very difficult sector to make money from, and not one I would look at investing in.

Harvey Nash (LON:HVN)

Share price: 77p (down 13% today)
No. shares: 73.5m
Market Cap: £56.6m

This recruitment company's shares are down 13% this morning, so there must be a mild profit warning, let's have a look.

Trading update - it doesn't look too bad. The key sentence says that operating profit for this year will be broadly similar (i.e. a bit below) last year. This has been caused by weakness in Europe - a table shows the breakdown, and it is striking how weak Europe is compared with other countries - more evidence that Europe seems to be sinking back into Recession.

What a disaster the single currency has been. If they don't do something drastic soon, to stimulate European economies, then the accumulation of sovereign debt in Italy and France will become too great to avoid default. Then what happens?? I don't think the Eurozone crisis is anywhere near over. It's possibly going to explode into a really major crisis again at some point.

My opinion - so do Harvey Nash shares represent good value? I would say they are starting to look interesting. The PER seems to be about 10, and the divi yield looks good - around 4% roughly I think. Although it's difficult to say when Europe will recover, it might be best to hold fire on buying these shares until some signs of recovery are appearing in Europe?

Cambria Automobiles (LON:CAMB)

I am impressed with the results today for y/e 31 Aug 2014 from this car dealership. EPS has risen 19% to 4.15p. The figures look clean to me, and the Balance Sheet is strong, with plenty of freeholds.

So at 48p the shares look good value at a PER of 11.6.

I've heard it argued that car dealers are enjoying peak trading, due to low interest rates, a glut of supply from European manufacturers, and maybe a backlog of replacement vehicles from the credit crunch aftermath.

However, most of CAMB's gross profit comes from aftersales (servicing, etc) and secondhand car sales. Therefore I am inclined to be sanguine about the forward outlook for car dealerships, providing they have strong Bal Sheets. Caffyns (LON:CFYN) is my favourite pick in this sector on valuation grounds, although the family control might put off some people.

Bubbles

I see that Concha (LON:CHA) has burst this morning, down 48%. Annoying, as I was limbering up to put a short on that one.

Fitbug Holdings (LON:FITB) also seems to be coming back down to earth too.

OK, I have to leave it there, as my flight has just had its departure gate announced.

Have a good week.

Regards, Paul.

(of the companies mentioned today, Paul has no long or short positions.

A fund management company with which Paul is associated may hold positions in companies mentioned)